The Big Short and Registration Payments

DollarI went to The Big Short movie last night. I consider myself an amateur economics student of that time period and have read all the books – The Big Short, Too Big To Fail, and the ones by Geitner, Bernanke and Paulson. I found the network effects of financial leverage when things go bad to be tragically fascinating.

It brought to mind some potential issues in our little space of race registration payments.

Funding with Float
The key potential problem for some registration providers is if they depend on the float of registration payments to fund their business. Some registration providers process money within their own bank account and then make payments from that account. The longer they take to make payments, the more money they have in “float” in their bank account to use for other purposes.

For example, if a registration company is processing $1M per month in race fees and makes payments to races on average 2 weeks after they collect the money, that is $500K of cash float. That $500K is money they do not have to raise by other means and can be used for all of their expenses (like paying employees or cloud computing or marketing or legal fees).

As long as this float is consistent, then there is no problem.

Potential Float Pressures
There are various things that can bring pressure on the use of the float:

  • Seasonal variability. There is more money flowing in April than December – so in the above example the float may range between $250K-$750K.
  • Customer Pressure. Customers may demand more frequent payments, forcing registration providers to move from two week cycles to daily cycles.
  • Loss of business. If business declines 10% due to customers moving to other platforms, then the float decreases by 10%. In the example above, this might mean a loss of $50,000 of cash available to meet payroll if the business is operating close to their cash flow and if they do not have spare capital.

No Float Operating Model
RunSignUp operates on a no float operating model. Most of the race fee revenue is held in either the PayFac accounts or in the Braintree Marketplace accounts of each customers sub-merchant account. RunSignUp has no access to use that money, only the ability to send instructions to pay it out to the race. We have a decreasing part of our business that is under our original system where the money flowed thru our bank account and we make weekly payments to those customers. Even with that, we ensure that we have cash beyond the amount owed to customers to operate our business.

I want to sleep well at night knowing there will not be a “run on the bank” in our business and we do not put customer’s money at risk in any way.

Why this is Important to Registration Companies
The worst thing you can do for your business is get into a cash crunch. It affects customer relationships negatively and can start a downward spiral that is difficult to get out of. We recommend all registration providers to become a Payment Facilitator if you can, or at least implement a system like Braintree Marketplace or Stripe where customer funds are held separately from your funds. This helps you avoid the temptation to use customer funds for other purposes.

And it is important that some registration companies do not fail like the banks in 2008-2009. There is no “bailout” that would come, and there would be some amount of contagion and flight of race fees to stronger vendors.

Why this is Important to Races
Your race may not need fast payment. Many of your expenses can be paid after the race is over, such as the timer, DJ, food, Port-a-potties, etc.

However, it is a fair question to ask your registration provider where your race fees are held and what their key numbers are:

  • Current Asset/Current Liability Ratio
  • Cash Balance – Race Payment Due = Net Real Cash for working capital

Chicken Little
I may be a bit of a “Chicken Little” on this topic. However, the industry has seen a pretty dramatic shift in vendor market share over the past few years with many smaller vendors coming into the market fed by the customers moving away from older vendors. So both older vendors and newer vendors may suffer if there is more change.

A little due diligence before selecting a registration provider may help you avoid any issues with your race.

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